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Dramatic tax changes recommended

The Tax Working Group has recommended a range of comprehensive tax changes including a method of taxing capital gains on residential rental properties.

The government will take time to consider the report but no action is likely until Australia's Henry Review of its tax system (among other things) is made public. Ken Henry, the head of Australia's treasury, delivered his findings to the Australian Treasurer just before Christmas.

Options suggested in a report by the New Zealand group released today include a risk-free rate of return method for calculating capital gains on investment properties.

The report also has an option of a low-rate land tax.

The risk-free rate of return method works as follows: if someone owns a $300,000 property with a $200,000 mortgage and the annual risk-free return rate is set at 4 percent, taxable income is calculated at 4 percent of the $100,000 of equity in the property, giving a tax of $4000.

Someone on a personal income tax rate of 38 percent therefore ends up paying $1520 of tax.

"Put simply, the tax system is broken and needs to be fixed," group chairman Professor Bob Buckle said.

"We've suggested a number of ways this can be done."

There was a once in a generation chance for New Zealand to have a world class tax system, he said.

The report also recommends increasing GST to 15 percent, saying this would have merit on efficiency grounds, but any increase in GST would require compensation for those on low incomes.

The report also says that the company, top personal and trust tax rates should be aligned to improve the integrity of the tax system.

Government Reaction

Responding to the release, Finance Minister Bill English said the Government would carefully consider the options presented.

“The Government’s focus in 2010 is increasing New Zealand’s economic growth and productivity,” Mr English said. “There is no doubt that good tax policy can play a role in that.

“For ordinary New Zealanders, we’re particularly keen to ensure that our tax system rewards effort, encourages savings and helps families to get ahead.

“At a broader economic level, we also want a tax system that helps move us away from our recent preoccupation with borrowing and consumption – at the same time recognising that any changes must be broadly fiscally neutral given that we face several years of budget deficits.

“As we’ve said, any changes would have to meet tests of equity and fairness, alongside delivering benefits for households and the economy. And given that we face another six years of Budget deficits, they need to be broadly fiscally neutral.”

Revenue Minister Peter Dunne welcomed the Group’s call for tax policy changes to be made within a coherent long-term strategy and framework and for them to be sustainable politically.

“I note the Working Group’s concerns regarding the misalignment of tax rates which encourages the use of trusts and companies, with a tax rate of 33 per cent and 30 per cent respectively, to shelter income that would otherwise be taxed at the higher personal tax rate of 38 per cent,” Mr Dunne said.

“This is inherently unfair to the wage and salary earner who is then left to bear a disproportionate share of the personal tax burden.”

No to land tax - Business NZ

Business NZ chief executive Phil O’Reilly said many of the Group's recommendations would find support among the business sector, but noted caution on some - mainly the land tax suggestion.

“Business will be firmly supportive of the recommendation to get our company tax rate competitive with rates in other countries, an important factor for economic growth.

“There will also be support for alignment of company, top personal and trust tax rates and for lower personal rates.”

Mr O’Reilly said he shared the group’s concerns about the distortions that would arise from a capital gains tax and also agreed that work is required on the tax treatment of residential rental properties.

But he said there could be problems with the recommendation for a land tax as this would be an anticompetitive cost on New Zealand’s many land-based enterprises.

“Enterprises already face a fairly stiff land tax through local body rates and this recommendation if accepted would impose a second tier of land taxation.”

Mr O'Reilly said it would be important for the Government to give a clear direction on its thinking on tax reforms by the time of the Budget as the current system is a "drag on New Zealand’s capability and competitiveness".